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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the Fiscal Year Ended December 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the Transition Period
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COMMISSION FILE NUMBER: 1-15325
Triton PCS Holdings, Inc.
(Exact name of Registrant as specified in its charter)
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Delaware |
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23-2974475 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. employer
identification number) |
1100 Cassatt Road
Berwyn, Pennsylvania 19312
(Address and zip code of principal executive offices)
(610) 651-5900
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Name of Exchange on Which Registered |
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Class A common stock, $.01 par value per share |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes þ No o
As of February 10, 2005, 61,926,760 shares of
registrant’s Class A common stock and
7,926,099 shares of the registrant’s Class B
non-voting common stock were outstanding.
As of June 30, 2004, the last business day of the
registrant’s most recently completed second fiscal quarter,
the aggregate market value of the shares of Class A common
stock held by non-affiliates (assuming that the
registrant’s only affiliates are officers of the
registrant) was approximately $283.9 million, based on the
closing pricing on the New York Stock Exchange on such date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the 2005 annual meeting of
stockholders are incorporated by reference into Part II,
Item 5 and Part III.
TRITON PCS HOLDINGS, INC.
FORM 10-K
TABLE OF CONTENTS
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PART I |
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| Item 1 |
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Business |
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| Item 2 |
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Properties |
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| Item 3 |
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Legal Proceedings |
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| Item 4 |
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Submission of Matters to a Vote of Security
Holders |
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PART II |
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| Item 5 |
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Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity
Securities |
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| Item 6 |
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Selected Financial Data |
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| Item 7 |
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Management’s Discussion and Analysis
of Financial Condition and Results of Operations |
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| Item 7A |
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Quantitative and Qualitative Disclosures
About Market Risk |
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| Item 8 |
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Financial Statements &
Supplementary Data |
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F-1 |
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Management’s Report on Internal Control Over Financial
Reporting |
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F-2 |
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Report of Independent Registered Public Accounting Firm |
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F-3 |
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Consolidated Balance Sheets |
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F-5 |
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Consolidated Statements of Operations and Comprehensive Income
(Loss) |
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F-6 |
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Consolidated Statements of Redeemable Preferred Equity and
Stockholders’ Equity (Deficit) |
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F-7 |
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Consolidated Statements of Cash Flows |
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F-8 |
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Notes to Consolidated Financial Statements |
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F-9 |
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| Item 9 |
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Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure |
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| Item 9A |
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Controls and Procedures |
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| Item 9B |
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Other Information |
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PART III |
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| Item 10 |
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Directors and Executive Officers of the
Registrant |
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| Item 11 |
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Executive Compensation |
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| Item 12 |
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Security Ownership of Certain Beneficial
Owners and Management |
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| Item 13 |
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Certain Relationships and Related
Transactions |
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| Item 14 |
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Principal Accountant Fees and Services |
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PART IV |
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| Item 15 |
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Exhibits and Financial Statement
Schedules |
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| SUPPLEMENTAL INDENTURE, DATED NOVEMBER 18, 2004 |
| SUPPLEMENTAL INDENTURE, DATED JANUARY 27, 2005 |
| SUPPLEMENTAL INDENTURE, DATED NOVEMBER 18, 2004 |
| SUPPLEMENTAL INDENTURE, DATED NOVEMBER 18, 2004 |
| SUPPLEMENTAL INDENTURE, DATED NOVEMBER 18, 2004 |
| SUPPLEMENTAL INDENTURE, DATED JANUARY 27, 2005 |
| FORM OF DIRECTORS STOCK AWARD AGREEMENT |
| FORM OF NOTIFICATION OF RESTRICTED STOCK AWARD |
| SUBSIDIARIES OF TRITON PCS HOLDINGS, INC. |
| CONSENT OF PRICEWATERHOUSECOOPERS LLP |
| CERTIFICATION OF CHIEF EXECUTIVE OFFICER |
| CERTIFICATION OF CHIEF FINANCIAL OFFICER |
| CERTIFICATION OF CONTROLLER |
| CERTIFICATION OF CHIEF EXECUTIVE OFFICER |
| CERTIFICATION OF CHIEF FINANCIAL OFFICER |
i
PRELIMINARY NOTE
This annual report on Form 10-K is for the year ended
December 31, 2004. This annual report modifies and
supersedes documents filed prior to this annual report. The
Securities and Exchange Commission, or the SEC, allows us
to “incorporate by reference” information that we file
with them, which means that we can disclose important
information to you by referring you directly to those documents.
Information incorporated by reference is considered to be part
of this annual report. In addition, information that we file
with the SEC in the future will automatically update and
supersede information contained in this annual report.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these
statements by forward-looking words such as anticipate,
believe, could, estimate, expect, intend, may, should, will
and would or similar words. You should read
statements that contain these words carefully because they
discuss our future expectations, contain projections of our
future results of operations or of our financial position or
state other forward-looking information. We believe that
it is important to communicate our future expectations to our
investors. However, there may be events in the future that we
are not able to accurately predict or control. The factors
listed in the “Risk Factors” section of the
market-making prospectus for our senior notes and our senior
subordinated notes dated August 30, 2004, as well as any
cautionary language in this report, provide examples of risks,
uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our
forward-looking statements. You should be aware that the
occurrence of the events described in the “Risk
Factors” section of the market-making prospectus for our
senior notes and our senior subordinated notes dated
August 30, 2004 and in this report could have a material
adverse effect on our business, results of operations and
financial position.
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PART I
Introduction
Our principal offices are located at 1100 Cassatt Road, Berwyn,
Pennsylvania 19312, and our telephone number at that address is
(610) 651-5900. Our Internet address is
http://www.tritonpcs.com. The information in our website
is not part of this report.
In this report, Triton, we, us and our refer to
Triton PCS Holdings, Inc. and its wholly-owned subsidiaries,
unless the context requires otherwise. Holdings refers to
Triton PCS Holdings, Inc. and Triton PCS refers to Triton
PCS, Inc., an indirect wholly-owned subsidiary of Holdings.
Overview
We are a leading provider of digital wireless communications
services in the southeastern United States, Puerto Rico and the
U.S. Virgin Islands. As of December 31, 2004, our
wireless communications network covered approximately
14.3 million potential customers in a contiguous geographic
area primarily encompassing portions of North Carolina, South
Carolina, Tennessee, Georgia and Kentucky. In addition, we
operate a wireless communications network covering approximately
4.0 million potential customers in Puerto Rico and the
U.S. Virgin Islands.
Triton provides its wireless communications services under the
SunCom Wireless brand name. From 1998 until December 2004, we
were a member of the AT&T Wireless network and a strategic
partner with AT&T Wireless. Beginning in 1998, AT&T
Wireless contributed personal communications services, or
PCS, licenses to us covering various markets in the
southeastern United States in exchange for an equity position in
Holdings. As part of our transactions with AT&T Wireless, we
were granted the right to be the exclusive provider of wireless
mobility services using co-branding with AT&T Corp. within
our region.
In October 2004, Cingular Wireless acquired all of the
outstanding stock of AT&T Wireless through a merger of a
Cingular Wireless subsidiary with and into AT&T Wireless. In
connection with this transaction, Triton, AT&T Wireless and
Cingular Wireless (and/or certain of their subsidiaries) entered
into the Triton PCS Holdings Agreement and Triton PCS Agreement
to modify our relationships with AT&T Wireless. Under these
agreements, which are described in detail below, AT&T
Wireless surrendered to Holdings, following the October 2004
consummation of the AT&T Wireless-Cingular Wireless merger,
all of the equity interests in Holdings held by AT&T
Wireless, and the parties concurrently terminated the agreement
under which AT&T Wireless had granted us the exclusive right
to provide AT&T Wireless branded wireless services within
our region. The termination of the exclusivity arrangement
permits the new AT&T/ Cingular Wireless entity the ability
to offer service in markets where they were previously
prohibited.
Two of the agreements with AT&T Wireless and Cingular
Wireless were entered into on July 7, 2004.
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Triton Holdings Agreement. On October 26, 2004 (the
date Cingular Wireless consummated its acquisition of AT&T
Wireless), pursuant to an agreement dated July 7, 2004 by
and among Holdings, AT&T Wireless Services, Inc., AT&T
Wireless PCS LLC and Cingular Wireless LLC, which we refer to as
the Triton Holdings Agreement, AT&T Wireless PCS
surrendered to Holdings all of the Holdings’ stock owned by
AT&T Wireless. Upon the surrender by AT&T Wireless PCS
of its Holdings stock, the First Amended and Restated
Stockholders’ Agreement was terminated. In addition,
Holdings’ Investors Stockholders’ Agreement, dated as
of February 4, 1998, as amended, by and among
Holdings’ initial cash equity investors and certain of its
management stockholders, also was terminated pursuant to its
terms upon termination of the First Amended and Restated
Stockholders’ Agreement. The termination of the First
Amended and Restated Stockholders’ Agreement allows the
combined Cingular Wireless/ AT&T Wireless to operate in
regions where Triton once had the right to operate exclusively
and allows Triton to operate in areas where it was once
prohibited. Also pursuant to the Triton Holdings Agreement,
AT&T Wireless transferred to |
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Triton its interest in the entity that controls the
“SunCom” brand name and related trademarks and waived
the payment of a $3.5 million dividend previously declared
by Holdings on its Series A preferred stock. |
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Triton PCS Agreement. Pursuant to an agreement dated
July 7, 2004 by and among Triton PCS, AT&T Wireless,
AT&T Wireless PCS LLC and Cingular Wireless, on
October 26, 2004, Triton PCS’ roaming agreement with
AT&T Wireless was terminated and Triton PCS’ roaming
agreement with Cingular Wireless was amended to extend the term
and reduce the roaming rates payable to Triton and its
affiliates thereunder. Without the exclusivity agreement that
previously applied to AT&T Wireless, Cingular Wireless will
not rely on our network for service to the same degree that
AT&T Wireless did in the past. Therefore, lower roaming
rates in combination with less Cingular usage will have a
negative impact on our revenue. However, since the rates are
reciprocal, we will be able to offer our customers wide-area
rate plans at acceptable rates of return due to lower expense
associated with reduced roaming rates. Accordingly, our roaming
revenue will decline, but the margin on our subscriber revenues
should improve. This change will make us less dependent on
roaming revenue, which is not directly within our control, and
will allow our subscriber revenues to produce a greater
proportion of our income from operations. In addition, AT&T
Wireless transferred certain Federal Communications Commission,
or FCC, licenses covering Savannah, Georgia, and
Asheville, Wilmington and Jacksonville, North Carolina, to
Triton in exchange for certain FCC licenses held by Triton
covering Savannah and Augusta, Georgia. As additional
consideration for this license exchange, Cingular Wireless also
paid Triton approximately $4.7 million. |
When the Triton Holdings Agreement and the Triton PCS Agreement
were entered into in July 2004, the parties also announced that
they had entered into a non-binding letter of intent to consider
a possible exchange of wireless network assets. The proposal to
enter into an exchange transaction arose during the course of
the broad-ranging discussion of the parties’ future
business relationships. After a series of negotiations over the
next three months, Holdings, AT&T Wireless and Cingular
Wireless entered into the Exchange Agreement described below.
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Exchange Agreement. On September 21, 2004, we
entered into an Exchange Agreement with AT&T Wireless and
Cingular Wireless which we refer to as the Exchange
Agreement. On December 1, 2004, pursuant to the closing
of the first stage of the Exchange Agreement, Triton transferred
PCS network assets held for use in its Virginia markets to
AT&T Wireless in exchange for PCS network assets held by
AT&T Wireless for use in certain of its North Carolina
markets, in Puerto Rico and in the U.S. Virgin Islands and
the payment by Cingular Wireless to Triton of $175 million. |
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Prior to the first closing of the Exchange Agreement, Triton and
AT&T Wireless separately contributed their respective
network assets and FCC license assets to two new, wholly-owned
subsidiaries — one to hold the transferred network
assets (other than certain associated FCC licenses) and the
other to hold the relevant FCC licenses. At the first closing,
the parties exchanged equity interests in the subsidiaries which
hold the network assets. At the second closing, which is
expected to occur after obtaining required FCC approvals, the
parties will exchange equity interests in the subsidiaries
holding the FCC licenses. Pending the second closing, the
parties have entered into spectrum lease agreements, which allow
each party to use the licensed PCS spectrum associated with the
previously exchanged network assets. See
footnote 4 — “Exchange Transaction” of
the notes to our consolidated financial statements for
additional disclosure regarding our accounting treatment of the
Exchange Agreement. This exchange transaction transformed the
geographic strategic focus of our wireless network by giving us
a substantial new presence in the Charlotte, Raleigh/ Durham and
Greensboro, North Carolina markets and entry into the Puerto
Rico market. Our entry into these markets will allow us to
operate a contiguous footprint in the Carolinas and will provide
us with a greater ability to grow our subscriber base. |
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In conjunction with the closing of the Exchange Agreement, we
entered into a transition services agreement with Cingular
Wireless. The transition services agreement requires us to
provide certain services in support of the Virginia business
which was transferred to Cingular Wireless for a limited
transition period following the closing of the Exchange
Agreement. Some of the more significant services provided are
subscriber billing, customer care, receivables management and
certain accounting functions. The transition period currently is
not expected to extend beyond the third quarter of 2005, and we
are reimbursed by Cingular Wireless on a monthly basis for each
service provided. The reimbursement rates are stipulated in the
transition services agreement and will be calculated on a per
subscriber basis. In return, Cingular Wireless will provide us
with similar services, where necessary, to support the acquired
North Carolina, Puerto Rico and U.S. Virgin Islands
business transferred to Triton, with the exception of customer
care and receivables management in Puerto Rico, which is managed
by us. We reimburse Cingular Wireless on a monthly basis at the
same per subscriber rate for each service provided by them. |
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Spectrum Leases. The first spectrum lease provides Triton
with access to the spectrum necessary to operate the businesses
acquired pursuant to the first closing of the Exchange Agreement
described above. Under this spectrum lease, Triton has access to
Cingular Wireless’ spectrum in certain of Triton’s
North Carolina markets and in Puerto Rico and the
U.S. Virgin Islands. This spectrum lease provides Triton
with exclusive access to the spectrum, but control of the
spectrum remains with Cingular Wireless. This spectrum lease has
an initial term of 180 days and is automatically extended
for an additional 180 day period if the second closing of
the Exchange Agreement has not been consummated. If the spectrum
lease is still in effect after 270 days, the spectrum lease
will be extended and will become automatically renewable for up
to 99 years. This spectrum lease terminates automatically
upon the consummation of the second closing, upon the effective
date of any governmental action revoking, canceling or
terminating the spectrum lease, or upon the effective date of
any governmental action revoking, canceling or terminating the
underlying spectrum license. |
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The second spectrum lease provides Triton with access to 10
megahertz of additional spectrum in Puerto Rico. Similar to the
first spectrum lease, Triton has exclusive access to the
spectrum at issue, but control of the spectrum remains with
Cingular Wireless. This spectrum lease expires on
December 1, 2005 and is not renewable. This spectrum lease
terminates automatically prior to the one-year term upon the
effective date of any governmental action revoking, canceling or
terminating the spectrum lease or upon the effective date of any
governmental action revoking, canceling or terminating the
underlying spectrum license. This second spectrum lease exists
because AT&T Wireless had been operating both Time Division
Multiple Access, or TDMA, technology and global system
for mobile communications and general packet radio service, or
GSM/ GPRS, technology in the Puerto Rico market with 35
megahertz of spectrum. With the continued migration of the
Puerto Rico subscriber base from TDMA technology to GSM/
GPRS technology, Triton will be able to provide the same
service level with 25 megahertz of spectrum by December 1,
2005, which is the lease termination date. |
As a result of these transactions, we are no longer the
exclusive provider of AT&T Wireless (now Cingular Wireless)
PCS service in our markets. We currently market our wireless
service under the SunCom Wireless brand name. Our strategy is to
provide extensive coverage to customers within our region, to
offer our customers high-quality, innovative voice and data
services with coast-to-coast coverage and to benefit from
roaming revenues generated by other carriers’ wireless
customers who roam into our covered area.
We believe our markets are strategically attractive because of
their strong demographic characteristics for wireless
communications services. According to the 2002 Paul Kagan
Associates Report, our service area includes 12 of the top 100
markets in the country with population densities that are higher
than the national average. We currently provide wireless voice
and data services over two overlapping networks. One network
uses TDMA technology, and the second network utilizes GSM/ GPRS
technology, which is capable of providing enhanced voice and
data services.
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Since we began offering service in our markets, our subscriber
base and total revenues have grown significantly. From our
initial launch of personal communications services in January
1999, our subscriber base has grown to 951,745 subscribers as of
December 31, 2004. As the result of our growing subscriber
base, total revenues have increased from $131.5 million for
the year ending December 31, 1999 to $818.2 million
for the year ending December 31, 2004. Revenues consist
primarily of monthly access, airtime, long distance and roaming
charges billed to our subscribers, equipment revenues generated
by the sale of wireless handsets and accessories to our
subscribers and roaming revenues generated by charges to other
wireless carriers for their subscribers’ use of our
network. Roaming minutes generated by non-Triton subscribers
increased from a monthly high of 16.5 million minutes in
1999 to a monthly high of 106.9 million minutes in 2004,
with total roaming minutes rising to 1.1 billion minutes in
2004. As the result of the termination of our First Amended and
Restated Stockholders’ Agreement and the exclusivity
arrangement with AT&T Wireless contained in that agreement,
we do not expect the trend of increasing roaming minutes to
continue. Our net loss has decreased from a loss of
$149.4 million for the year ended December 31, 1999 to
net income of $682.5 million for the year ended
December 31, 2004. The net income increase is primarily due
to an aggregate pre-tax non-operating gain of approximately
$814.4 million incurred on the Triton Holdings Agreement
and Triton PCS Agreement as well as our Exchange Agreement with
Cingular Wireless and AT&T Wireless. Despite our net income
for the year ended December 31, 2004, we expect to incur
net losses in the foreseeable future, primarily as the result of
interest expense exceeding income from operations. Our
accumulated deficit decreased to $193.6 million, as of
December 31, 2004, as a result of our net income for the
current year. Since the inception of our personal communications
services in January 1999, our long-term debt has increased from
$465.7 million to $1.7 billion as of December 31,
2004. This increase is due primarily to the increased funding
required to build-out our network, which includes 2,636 cell
sites and ten switches.
Our goal is to provide our customers with simple, easy-to-use
wireless services with superior call quality, personalized
customer care and competitive pricing. We utilize a mix of sales
and distribution channels, including as of December 31,
2004, a network of 114 company-owned SunCom retail stores,
local retailers, direct sales representatives covering corporate
accounts and telemarketing.
Competitive Strengths
As a leading provider of wireless communication services in the
southeastern United States, Puerto Rico and the U.S. Virgin
Islands, we have a number of competitive strengths, including
the following:
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Attractive Licensed Area. Our markets have favorable
demographic characteristics for wireless communications
services, such as population densities that are higher than the
national average. |
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Network Quality. We believe that the quality and
extensive coverage of our network provide a strategic advantage
over wireless communications providers against which we compete.
We have successfully launched and offer personal communications
service to approximately 18.3 million people in 30 markets.
We have constructed a comprehensive network, which includes
2,636 cell sites and ten switches, using TDMA and GSM/ GPRS
digital technology. This allows us to provide more advanced
wireless data services to our subscribers as well as to earn
roaming revenue from other wireless carriers who offer similar
products. Our network is compatible with the networks of
Cingular Wireless, T-Mobile and other wireless communications
service providers that use either TDMA or GSM/ GPRS technology. |
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Experienced Management. We have a management team with a
high level of experience in the wireless communications
industry. Our senior management team has extensive experience
with wireless leaders such as AT&T Wireless, Verizon
Communications and Horizon Cellular. Our senior management team
also owns approximately 8.3% of Holdings’ outstanding
Class A common stock. |
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Business Strategy
Our objective is to become the leading provider of wireless
communications services in the markets we serve. We intend to
achieve this objective by pursuing the following business
strategies:
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Operate a Superior, High-Quality Network. Our market
research indicates that scope and quality of coverage are
extremely important to customers in their choice of a wireless
service provider. We are committed to making the capital
investment required to maintain and operate a superior,
high-quality network. We provide extensive coverage within our
region and consistent quality performance, resulting in a high
level of customer satisfaction. Historically, greater than 99%
of all calls attempted on our network are connected. |
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Provide Enhanced Value. We offer our customers rate plans
tailored to their personal needs at competitive prices. Our
affordable, simple pricing plans, including the UnPlan, which
provides essentially unlimited calling from a subscriber’s
local calling area for a fixed price, are designed to promote
the use of wireless services. |
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Deliver Quality Customer Service. We believe that
superior customer service is a critical element in attracting
and retaining customers. Our point-of-sale activation process is
designed to ensure quick and easy service initiation, including
customer qualification. Through our interactive voice response
system, or IVR, and our state-of-the-art customer care
facilities in Richmond, Virginia and Charleston, South Carolina
we emphasize proactive and responsive customer care, including
rapid call-answer times, welcome packages and anniversary calls.
We supplement these facilities with customer care services
provided by Convergys Corporation in Clarksville, Tennessee and
Atento de Puerto Rico in Caguas, Puerto Rico. |
License Acquisition Transactions
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Transactions with Lafayette |
In November 2004, we acquired a 39% interest in Lafayette
Communications Company L.L.C., or Lafayette, for nominal
consideration. During the fourth quarter of 2004, we acquired
personal communication service licenses in Savannah, Georgia and
Danville, Virginia from Lafayette for aggregate cash
consideration of approximately $2.2 million. The
10-megahertz Danville, Virginia license and 15-megahertz
Savannah, Georgia license cover populations of approximately
167,200 and 147,600 people, respectively. For more information,
see “Management’s Discussion and Analysis of Financial
Condition and Results of Operation — Relationship with
Lafayette Communications Company L.L.C.”
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Transaction with AT&T Wireless and Cingular
Wireless |
On November 18, 2004, AT&T Wireless transferred certain
FCC licenses covering Savannah, Georgia, and Asheville,
Wilmington and Jacksonville, North Carolina, to Triton in
exchange for certain FCC licenses held by Triton covering
Savannah and Augusta, Georgia. As additional consideration for
this license exchange, Cingular Wireless paid Triton
approximately $4.7 million.
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Acquisition of Urban Comm-North Carolina, Inc. |
On October 28, 2004, we finalized the terms of a proposed
stock purchase agreement to acquire Urban Comm — North
Carolina, Inc., or Urban, and submitted the proposed
agreement to the U.S. Bankruptcy Court for approval. On
December 1, 2004, the Bankruptcy Court entered an Interim
Relief Order which, among other things, permitted that Triton
and Urban enter into the stock purchase agreement. Because Urban
is currently under Chapter 11 bankruptcy protection, final
approval of the agreement and the transactions contemplated by
the agreement will have to be confirmed as part of a plan of
reorganization, which is subject to acceptance by Urban’s
creditors and the approval of the Bankruptcy Court. In addition,
the FCC is Urban’s largest creditor and, therefore, the FCC
and U.S. Department of Justice will have to agree to settle
all claims related to the outstanding debt obligations owed to
the FCC by Urban in exchange for a repayment of debt owed to the
FCC by Urban. The timing of this settlement
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process cannot be predicted at this time. Upon approval of the
FCC settlement by the Bankruptcy Court and Urban obtaining
standard FCC consents, Urban will be in a position to seek
confirmation of its plan of reorganization.
Under the stock purchase agreement, we would acquire the
outstanding stock of Urban, whose sole assets consist of FCC
wireless licenses in 20 basic trading areas for
$113.0 million in cash. Of the 20 licenses, eight are in
North Carolina, five are in South Carolina and seven are in
Virginia. The licenses consist of eighteen 10-megahertz licenses
and two 20-megahertz licenses. Collectively, the acquired
licenses cover an area with a population of approximately
7.4 million people.
Sales and Distribution
Our sales strategy is to utilize multiple distribution channels
to minimize customer acquisition costs and to maximize
penetration within our licensed service area. Our distribution
channels include a network of company-owned retail stores, a
direct sales force for corporate accounts, independent agent
retailers, telesales and online sales. During 2004, we continued
shifting more of our channel mix to company owned channels and
more strategically aligned agents.
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Company-Owned Retail Stores. We make extensive use of
company-owned retail stores for the distribution and sale of our
handsets and services. We believe that company-owned retail
stores offer a considerable competitive advantage by providing a
strong local presence, which is required to achieve high retail
penetration in suburban and rural areas and the lowest customer
acquisition cost. We had 114 company-owned SunCom retail
stores open as of December 31, 2004. |
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Direct Sales. We focus our direct sales force on
corporate users. As of December 31, 2004, our direct
corporate sales force consisted of 47 dedicated professionals
targeting wireless decision-makers within large and mid-sized
corporations. |
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Agent Distribution. We have distribution agreements with
strategically-aligned regional agent retailers. |
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Direct Marketing. We use direct marketing efforts such as
direct mail and telemarketing to generate customer leads.
Telesales allow us to maintain low selling costs and to sell
additional features or customized services. |
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Website. We have established an online store on our
website, http://www.suncom.com. The online store conveys
our marketing message and generates customers through online
purchasing. We deliver all of the information a customer
requires to make a purchasing decision on our website. Customers
are able to choose rate plans, features, handsets and
accessories. The online store provides a secure environment for
transactions, and customers purchasing through the online store
encounter a transaction experience similar to that of customers
purchasing service through other channels. |
Marketing Strategy
We have developed our marketing strategy based on market
research within our markets. We believe that our simple,
attractive pricing plans, superior customer care, network
reliability and targeted advertising will allow us to increase
our subscriber base by maintaining customer satisfaction,
thereby reducing customer turnover.
The following are key components of our marketing strategy:
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Pricing. Our pricing plans are competitive and
straightforward. We offer our customers large packages of
minutes within our regional calling area plus roaming access to
the nation’s largest GSM/ GPRS network. Most of our rate
plans allow customers to make and receive calls without paying
additional roaming or long distance charges within our regional
calling area. It is by virtue of our extensive network and
roaming arrangements with roaming partners, that we can offer
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competitive rate plans. We also offer the UnPlan, which provides
unlimited calling from a subscriber’s local calling area at
a fixed price. |
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Customer Care. We are committed to building strong
customer relationships by providing our customers with service
that exceeds expectations. We currently operate state-of-the-art
customer care facilities in Richmond, Virginia and Charleston,
South Carolina, which house our customer service and collections
personnel. We supplement these facilities with customer care
services provided by Convergys Corporation in Clarksville,
Tennessee and Atento de Puerto Rico in Caguas, Puerto Rico.
Through the support of approximately 421 customer care
representatives and a sophisticated customer care information
system, inclusive of an IVR system implemented in 2003, we have
been able to implement a goal of one ring customer care service
using live operators and state-of-the-art call routing. |
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Advertising. We believe our most successful marketing
strategy is to establish a strong local presence in each of our
markets. We are directing our media and promotional efforts at
the local communities we serve with advertisements in local
publications and sponsorship of local and regional events. We
combine our local efforts with mass marketing strategies and
tactics to build the SunCom brand locally. Our media effort
includes television, radio, newspaper, magazine, outdoor and
Internet advertisements to promote our brand. In addition, we
use newspaper and radio advertising and our web page to promote
specific product offerings and direct marketing programs for
targeted audiences. |
Network Build-Out
The principal objective for the build-out of our network is to
maximize service levels within targeted demographic segments and
geographic areas. Our TDMA and GSM/ GPRS networks service 30
markets and include 2,636 cell sites and ten switches. Our
digital wireless network connects to local and long distance
exchange carriers. We have interconnection agreements with
telephone companies operating or providing services in the area
where we are currently operating our digital personal
communications services network. We use AT&T as our long
distance carrier.
Network Operations
We have agreements for switched interconnection/backhaul, long
distance, roaming, network monitoring and information technology
services in order to effectively maintain, operate and expand
our network.
Switched Interconnection/ Backhaul. Our network is
connected to the public switched telephone network to facilitate
the origination and termination of traffic on our network.
Long Distance. We have a wholesale long distance
agreement with AT&T Corp. that provides preferred rates for
long distance services.
Roaming. Through our agreement with Cingular Wireless,
our customers have roaming capabilities on Cingular
Wireless’ network. Further, we have established roaming
agreements with other wireless carriers, including in-region
roaming agreements to enhance coverage where necessary in our
service areas.
Network Monitoring Systems. Our network monitoring system
provides around-the-clock surveillance of our entire network.
The network operations center is equipped with sophisticated
systems that constantly monitor the status of all switches and
cell sites, identify failures and dispatch technicians to
resolve issues. Operations support systems are utilized to
constantly monitor system quality and identify devices that fail
to meet performance thresholds. These same platforms generate
statistics on system performance such as dropped calls, blocked
calls and handoff failures. Our network operations center
located in Richmond, Virginia performs maintenance on common
network elements such as voice mail, home location registers and
short message centers.
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Network Digital Technology
Our network utilizes TDMA technology on the IS-136 platform.
This technology allows for the use of advanced multi-mode
handsets, which permit roaming across personal communications
services and cellular frequencies, including both analog and
digital cellular. This technology also allows for enhanced
services and features, such as short-messaging, extended battery
life, added call security and improved voice quality, and its
hierarchical cell structure enables us to enhance network
coverage with lower incremental investment through the
deployment of micro, as opposed to full-size, cell sites. In
order to provide more advanced wireless data and voice services,
we have chosen to deploy GSM/ GPRS technology as an overlay to
our TDMA network. We have deployed GSM/ GPRS technology to
provide more advanced data and voice services to new subscribers
and to our existing subscribers who may migrate to this
technology. In addition, our GSM/ GPRS deployment has enabled us
to earn roaming revenue from other wireless carriers who are
selling GSM/ GPRS handsets. TDMA and GSM/ GPRS technology are
currently used by two of the largest wireless communications
companies in the United States: Cingular Wireless and T-Mobile.
Federal Regulation
The wireless telecommunications industry is subject to extensive
governmental regulation on the federal level and, to a smaller
degree, the state and local levels. The information disclosed
below is applicable to our licenses in the continental United
States as well as Puerto Rico, unless specifically noted
otherwise. We are subject to, among other federal statutes, the
Communications Act of 1934, as amended from time to time (the
Communications Act), and the associated rules,
regulations and policies promulgated by the FCC. Through the
Communications Act, the FCC regulates aspects of the licensing,
construction, operation, acquisition and sale of personal
communications services and cellular systems in the United
States. Many FCC requirements impose certain restrictions on our
business that could have the effect of increasing our costs.
However, at this time, the FCC does not regulate wireless
communications service rates, and the Communications Act
preempts state and local rate and entry regulation of our
wireless services, as described below.
Personal communications services and cellular systems are
subject to certain Federal Aviation Administration regulations
governing the location, lighting and construction of transmitter
towers and antennas and may be subject to regulation under
federal environmental laws and the FCC’s environmental
regulations. Also, we use common carrier point-to-point
microwave facilities to connect the transmitter, receivers and
signaling equipment for some personal communications services
system or cellular sites, and to link them to the main switching
office. The FCC licenses these facilities separately and they
are subject to regulation as to technical parameters and service.
Additionally, as discussed below, we are subject to certain
state and local regulations and approvals, including state or
local zoning and land use regulations.
Licensing of Cellular and Personal Communications Services
Systems. We hold a variety of cellular, personal
communications services, and microwave licenses, as authorized
by the FCC. A broadband personal communications services system
operates under a protected geographic service area license
granted by the FCC for a particular market on one of six
frequency blocks allocated for broadband personal communications
services. Broadband personal communications services systems
generally are used for two-way voice and high volume data
applications. Narrowband personal communications services, in
contrast, are used for non-voice applications such as paging and
low volume data service and are separately licensed. The FCC has
segmented the United States into personal communications
services markets, resulting in 51 large regions, referred to as
major trading areas, which are comprised of 493 smaller regions,
referred to as basic trading areas. The FCC initially auctioned
and awarded two broadband personal communications services
licenses for each major trading area and four licenses for each
basic trading area. The two major trading area licenses
authorize the use of 30 megahertz of spectrum. One of the basic
trading area licenses is for 30 megahertz of spectrum, and the
other three are for 10 megahertz each. The FCC permits licensees
to split their licenses and assign a portion, on either a
geographic or
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frequency basis or both, to a third party. Two cellular
licenses, 25 megahertz each, are also available in each market.
Cellular markets are defined as either metropolitan or rural
service areas and do not correspond to the broadband personal
communications services markets. Specialized mobile radio
service licenses can also be used for two-way voice
applications. In total, eight or more licenses suitable for
two-way voice and high volume data applications are available in
a given geographic area.
All personal communications services licenses generally have
10-year terms, at the end of which they must be renewed. The FCC
will award a renewal expectancy to a personal communications
services licensee that has:
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provided substantial service during its past license
term; and |
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substantially complied with applicable FCC rules and policies
and the Communications Act. |
Cellular radio licenses also generally expire after a 10-year
term and are renewable for periods of 10 years upon
application to the FCC. Our one cellular license, which covers
the Myrtle Beach area, could be revoked for cause and our
license renewal application denied if the FCC determines that a
renewal would not serve the public interest. FCC rules provide
that competing renewal applications for cellular licenses will
be considered in comparative hearings and establish the
qualifications for competing applications and the standards to
be applied in hearings. Under current policies, the FCC will
grant incumbent cellular licensees the same renewal expectancy
granted to personal communications services licensees. We expect
to meet all future application requirements with respect to the
renewal of both our cellular and personal communications
services licenses.
Build-Out and Microwave Relocation Obligations. All
personal communications services licensees must satisfy certain
coverage requirements. In our case, we must construct facilities
sufficient to offer radio signal coverage to one-third of the
population of our service area within five years of the original
license grants and to two-thirds of the population within ten
years. Alternatively, we can make a showing of “substantial
service,” a term which is not precisely defined under the
FCC’s rules although the FCC has established a “safe
harbor” under which a mobile licensee will meet the
substantial service requirement if it provides coverage to at
least 75 percent of the geographic area of at least
20 percent of the rural areas within the licensed area.
Licensees that fail to meet the coverage requirements may be
subject to forfeiture of their licenses. We have met the
five-year construction deadline for all of our personal
communications services licenses; our earliest ten-year
construction deadline is in 2005. We anticipate meeting the
ten-year construction deadline for licenses subject to renewal
this year. Our cellular license is not subject to these coverage
requirements. In 2003, the FCC adopted a Notice of Proposed
Rulemaking seeking comment on proposals to expand licensee
build-out requirements. Among the proposals examined were
proposals to adopt additional coverage requirements beyond the
initial 10-year license term and proposals to reclaim spectrum
that is not in use by a defined period of time. In July 2004,
the FCC acknowledged a preference for market-based mechanisms to
facilitate spectrum access, but also stated that it may be
appropriate at some time to revert to a re-licensing approach if
spectrum is not being used. The FCC therefore sought further
comment on possible re-licensing approaches and construction
obligations for current and future licensees who hold licenses
beyond their first term.
When it was licensed, personal communications services spectrum
was encumbered by existing licensees that operate certain fixed
microwave systems. To secure a sufficient amount of unencumbered
spectrum to operate our personal communications services systems
efficiently and with adequate population coverage, we have
relocated several of these incumbent licensees. In an effort to
balance the competing interests of existing microwave users and
newly authorized personal communications services licensees, the
FCC adopted:
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a transition plan to relocate such microwave operators to other
spectrum blocks; and |
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a cost sharing plan so that if the relocation of an incumbent
benefits more than one personal communications services
licensee, those licensees will share the cost of the relocation. |
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The transition and cost sharing plans expire on April 4,
2005, at which time remaining microwave incumbents in the
personal communications services spectrum will be responsible
for the costs of relocating to alternate spectrum locations. Our
cellular license is not encumbered by existing microwave
licenses.
Spectrum Caps and Spectrum Leasing. Prior to 2003, the
FCC had specific spectrum aggregation limits, known as spectrum
caps, for attributable interests in broadband personal
communications services, specialized mobile radio services and
cellular licensees in any geographical area. Although there is
no longer a specified limit on spectrum holdings, the FCC
evaluates commercial wireless transactions on a case-by-case
basis to determine whether such transactions will result in too
much concentration in wireless markets. While the FCC has
permitted licensees to own up to 80 megahertz of spectrum in
particular markets, recent transactions indicate that the FCC
currently uses a “soft” spectrum cap of 70 megahertz
when evaluating the competitive impact of a proposed transaction.
FCC rules permit spectrum licensees to enter leasing agreements
with third parties. They allow wireless licensees, like us, to
lease their spectrum to third parties on either a short-term or
long-term basis. Two leasing options are available. The first,
which requires prior FCC notice but not prior FCC approval,
allows parties to lease spectrum as long as the licensee retains
a certain degree of control over the license. We currently lease
spectrum to and from Cingular Wireless under this option. The
second, which requires prior FCC approval, allows parties to
lease spectrum where the lessee is in actual control of the
license, although the licensee retains legal control. FCC rules
also provide for “private commons” spectrum access
arrangements under which spectrum licensees can make their
spectrum available for use by advanced technologies in a manner
similar to that by which unlicensed users gain access to
unlicensed spectrum. We currently do not lease or otherwise make
available any spectrum under these last two options.
New Spectrum Opportunities and Advanced Wireless Data
Services. In addition to the spectrum currently licensed for
personal communications services, cellular and specialized
mobile radio services, the FCC has allocated additional spectrum
for wireless carrier use. While this spectrum may be used by new
companies that would compete directly with us, this spectrum
could also be acquired by existing wireless companies and used
to provide advanced or third generation data services, such as
those we plan to offer over our GSM/ GPRS network. This new
spectrum includes 30 megahertz in the upper 700 megahertz band
that is currently used by television broadcasters during their
transition to digital television; 90 megahertz in the 1710-1755
and 2110-2155 megahertz bands that currently has both
governmental and non-governmental users, including the
multipoint distribution service; and 20 megahertz of spectrum
that includes the so-called H block at 1915-1920 megahertz
paired with 1995-2000 megahertz, and the so-called J block at
2020-2025 megahertz paired with 2175-2180 megahertz (which are
currently used by unlicensed personal communications services,
mobile satellite services, broadcast auxiliary service and fixed
service users and licensees). New spectrum licenses will be
awarded by auction and the FCC has announced that it intends to
begin the auction for licenses in the 1710-1755 and 2110-2155
megahertz bands as early as June 2006. The FCC also has changed
the spectrum allocation available to certain mobile satellite
service operators to allow them to integrate an ancillary
terrestrial component into their networks, thereby enabling
mobile satellite service operators to provide terrestrial
wireless services to consumers in spectrum previously reserved
only for satellite services. It is unclear what impact, if any,
these allocations will have on our current operations.
In June 2004, the FCC announced it would auction over 200
broadband PCS licenses beginning January 12, 2005. The
auction start date was later extended to January 26, 2005.
These licenses were returned to the FCC as a result of license
cancellations or terminations and the list of licenses available
for auction includes licenses within our current service area.
The auction rules restricted parties that do not qualify under
the FCC’s rules as a “designated entity” (a small
business), including us, from bidding on some of the licenses.
We did not participate in the auction, but Lafayette, in which
we have a minority, non-controlling ownership interest,
participated in the auction as a designated entity, and was the
high bidder for one license. The winning bid price for this
license was approximately $0.4 million.
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Transfers and Assignments of Cellular and Personal
Communications Services Licenses. The Communications Act and
FCC rules require the FCC’s prior approval of the
assignment or transfer of control of a license for a personal
communications services or cellular system. However, in an Order
released in September 2004, the FCC determined that it will
forbear from the prior approval requirement in certain
situations. The new rules provide for immediate processing of
transfer and assignment applications where the parties certify
that they comply with foreign ownership and other basic licensee
qualification requirements and that the proposed transaction
will not result in overlap with other spectrum interests of the
transferee, is not subject to transfer restrictions under the
FCC’s designated entity rules, does not require any waivers
of FCC rules, and does not involve any licenses subject to
pending revocation or termination proceedings. Transactions that
meet these criteria will be eligible for overnight electronic
processing. Non-controlling interests in an entity that holds an
FCC license generally may be bought or sold without FCC approval.
We may also be required to obtain approval of the Federal Trade
Commission and the Department of Justice, as well as state or
local regulatory authorities having competent jurisdiction, if
we sell or acquire personal communications services or cellular
interests over a certain size.
Foreign Ownership. Under existing law, no more than 20%
of an FCC licensee’s capital stock may be owned, directly
or indirectly, or voted by non-U.S. citizens or their
representatives, by a foreign government or its representatives
or by a foreign corporation. If an FCC licensee is controlled by
another entity, up to 25% of that entity’s capital stock
may be owned or voted by non-U.S. citizens or their
representatives, by a foreign government or its representatives
or by a foreign corporation. Foreign ownership above the 25%
level may be allowed should the FCC find such higher levels not
inconsistent with the public interest. The FCC has ruled that
higher levels of foreign ownership, even up to 100%, are
presumptively consistent with the public interest with respect
to investors from certain nations. If our foreign ownership were
to exceed the permitted level, the FCC could revoke our FCC
licenses, although we could seek a declaratory ruling from the
FCC allowing the foreign ownership or take other actions to
reduce our foreign ownership percentage to avoid the loss of our
licenses. We have no knowledge of any present foreign ownership
that exceeds these limitations in violation of the FCC’s
restrictions.
Enhanced 911 Services. Commercial mobile radio service
providers are required to transmit 911 calls and relay a
caller’s automatic number identification and cell site to
designated public safety answering points. This ability to relay
a telephone number and originating cell site is known as
Phase I enhanced 911, or “E-911,” deployment. FCC
regulations also require wireless carriers to identify within
certain parameters the location of 911 callers by adoption of
either network-based or handset-based technologies. This more
exact location reporting is known as Phase II E-911, and
the FCC has adopted specific rules governing the accuracy of
location information and deployment of the location capability.
We are deploying a network-based technology to provide
Phase II service.
FCC rules originally required carriers to provide Phase I
service as of April 1, 1998, or within six months of a
request from a public safety answering point, whichever is
later, and to provide Phase II service as of
October 1, 2001, or within six months of a request from a
public safety answering point, whichever is later. Our
Phase II service initial deadline was extended by the FCC
to March 1, 2003, as was the deadline for other regional
and local carriers. The six-month time frames for beginning
Phase I or Phase II service do not apply if a public
safety answering point does not have the equipment and other
facilities necessary to receive and use the provided data.
Public safety answering points and wireless carriers are
permitted to extend these implementation timelines by mutual
agreement.
Radiofrequency Emissions. FCC guidelines adopted in 1996
limit the permissible human exposure to radiofrequency radiation
from transmitters and other facilities. In December 2001, the
FCC’s Office of Engineering and Technology, or OET,
dismissed a Petition for Inquiry filed by EMR Network to
initiate a proceeding to revise the FCC’s radiofrequency
guidelines. In August 2003, the full FCC upheld the OET and in
December 2004, the United States Court of Appeals for the
District of Columbia Circuit affirmed the FCC decision. In June
2003, the FCC adopted a Notice of Proposed Rulemaking seeking
comment on proposed amendments to the current regulations
relating to the compliance of transmitter facilities with
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radiofrequency guidelines and to procedures for evaluating
radiofrequency exposure from mobile devices, such as handsets.
This Notice remains pending, and it is not clear what effect, if
any, any amendments to such regulations would have on our
business.
Media reports have suggested that, and studies have been
undertaken to determine whether, certain radio frequency
emissions from wireless handsets may be linked to various health
concerns, including cancer, and/or may interfere with various
electronic medical devices, including hearing aids and
pacemakers. Concerns over radio frequency emissions may have the
effect of discouraging the use of wireless handsets, which would
decrease demand for our services. However, reports and fact
sheets from the British National Radiological Protection Board
and Swedish Radiation Protection Authority released in 2004, the
National Cancer Institute released in January 2002, the American
Health Foundation released in December 2000 and the Danish
Cancer Society released in February 2001, found no evidence that
cell phones cause cancer, although some of the reports indicated
that further study might be appropriate. The National Cancer
Institute, nonetheless, cautioned that the studies have
limitations, given the relatively short amount of time cellular
phones have been widely available. In addition, the Federal
Trade Commission issued a consumer alert in February 2002 for
cell phone users who want to limit their exposure to radio
frequency emissions from their cell phones. The alert advised,
among other things, that cell phone users should limit use of
their cell phones to short conversations and avoid cell phone
use in areas where the signal is poor. Most recently in a study
released in December, 2004, European researchers said that
exposure to radio frequency emissions damaged DNA in cells in
laboratory tests conducted over the past four years. While the
researchers did not then link radio frequency emissions to
adverse health effects, the researchers did call for further
study. Additional studies of radio frequency emissions are
ongoing. The ultimate findings of these studies will not be
known until they are completed and made public. Several lawsuits
seeking to force wireless carriers to supply headsets with
phones and to compensate consumers who have purchased
radiation-reducing devices were dismissed by the courts in 2002
because of a lack of scientific evidence, but other lawsuits
remain pending. We cannot predict the impact of these or other
health related lawsuits on our business.
Interconnection. Under amendments to the Communications
Act enacted in 1996, all telecommunications carriers, including
personal communications services and cellular licensees, have a
duty to interconnect with other carriers and local exchange
carriers have additional specific obligations to interconnect.
The amendments and the FCC’s implementing rules modified
the previous regime for interconnection between local exchange
carriers and wireless communications services providers, such as
us, and adopted a series of requirements that have benefited the
wireless industry. These requirements included compensation to
carriers for terminating traffic originated by other carriers, a
ban on any charges to other carriers by originating carriers,
and specific rules governing the prices that can be charged for
terminating compensation. Under the rules, prices for
termination of traffic and certain other functions provided by
local exchange carriers are set using a methodology known as
“total element long run incremental cost,” or
TELRIC. TELRIC is a forward-looking cost model that sets
prices based on what the cost would be to provide network
elements or facilities over the most efficient technology and
network configuration. The statute also permits carriers to
appeal public utility decisions implementing the statute and
rules to United States District Courts, rather than state
courts. As a result of these FCC rules, the charges that
cellular and personal communications services operators pay to
interconnect their traffic to the public switched telephone
network have declined significantly from pre-1996 levels.
The initial FCC interconnection rules material to our operations
have become final and unappealable following a May 2002 Supreme
Court decision affirming the rules. Subsequently, the FCC issued
a clarification of its interconnection rules, initiated a
rulemaking to modify the TELRIC rules and initiated a third
proceeding which, collectively, have created some uncertainty.
More specifically:
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In August 2003, the FCC released a clarification of its TELRIC
rules that could increase our costs of interconnection. |
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In September 2003, the FCC initiated a rulemaking to consider
broader modifications to the TELRIC rules, which could increase
or decrease our costs of interconnection. This proceeding
remains pending. |
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In 2001, the FCC initiated a proceeding that could greatly
modify the current regime of payments for interconnection. In
February 2005, the FCC decided to seek comment on seven specific
interconnection proposals filed by different industry groups and
others in the proceeding, which have varying impacts on wireless
carriers. In February 2005, the FCC also determined that local
exchange carriers may no longer file “wireless termination
tariffs” regarding termination rates to be charged to
wireless carriers as part of the interconnection negotiation
process. In addition, key members of Congress have expressed
strong interest in reviewing and modifying the current
interconnection system of payments during the next two years. If
the FCC or Congress modifies the current regime of payments for
interconnection, our costs for interconnection could change. |
Universal Service Funds. The FCC and many states have
established “universal service” programs to ensure
affordable, quality local telecommunications services for all
U.S. residents. Under the FCC’s rules, wireless
providers are potentially eligible to receive universal service
subsidies; however, they also are required to contribute to both
federal and state universal service funds. The FCC rules require
telecommunications carriers generally (subject to limited
exemptions) to contribute funding to existing universal service
programs for high cost carriers and low income customers and to
new universal service programs to support services to schools,
libraries and rural health care providers. In December 2002 and
January 2003, the FCC released orders that increased, from 15 to
28.5 percent, the percentage of revenues that wireless
providers must subject to universal service contributions to
avoid having to calculate those contributions based on actual
interstate traffic levels, and that required wireless providers
to elect whether or not to use this “safe harbor” on a
company-wide basis.
The FCC has been reviewing wireless carriers’ continued
eligibility to receive universal service funding, as well as the
appropriate amount of funding for various “eligible
telecommunications carriers,” in two proceedings. In
February 2004, the Federal-State Joint Board on Universal
Service issued a recommended decision proposing that the FCC
modify the current universal service rules. If adopted, the
proposals would limit support to a single connection per
customer and would narrow the circumstances under which a new
service provider would be able to qualify for support. In June
2004, the FCC asked for public comment on the Federal-State
Joint Board recommended decision, and in February 2005 the FCC
decided that wireless carriers should remain eligible to receive
universal service fund payments and that there should be no
“primary line restriction” or limitation of support to
a single line. The FCC did tighten the standards for its
designation of wireless carriers as eligible to receive
universal support by imposing new eligibility requirements,
public interest determinations, and annual certification and
reporting requirements, and the FCC encouraged states to adopt
similar requirements as part of their universal service
designation processes. In a second proceeding launched in 2004,
the Federal-State Joint Board is considering the basis and
amount of universal service support that telecommunications
carriers should receive, including whether the current funding
structure should be replaced with a forward-looking cost
approach and whether wireless carrier support should be based on
wireline incumbent costs or wireless carrier costs. Because we
are now receiving universal service funding in Puerto Rico as a
result of a recent transaction, any changes could limit our
ability to continue to receive some or all of the universal
service support that we are receiving in Puerto Rico, or to
apply for and receive such funding in other states. Regardless
of our ability to receive universal service funding for the
supported services we provide, we are required to fund these
federal programs and may also be required to contribute to state
universal service programs.
Outage Reporting. On August 4, 2004, the FCC adopted
new rules that require wireless providers to report to the FCC
about significant disruptions, network degradations or outages
to their systems. Under the new rules, we are required to report
to the FCC whenever we have a significant network disruption
that lasts for at least 30 minutes and the number of end-user
minutes potentially affected is at least 900,000. We also must
report significant network problems that impact 911 usage or
service at airports, nuclear power plants and key government and
military facilities or when critical transmission and network
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control technologies are disrupted. Several parties have
petitioned the FCC to eliminate or modify these new rules and
those petitions remain pending.
Electronic Surveillance. The FCC has adopted rules
requiring providers of wireless services that are interconnected
to the public switched telephone network to provide functions to
facilitate electronic surveillance by law enforcement officials.
The Communications Assistance for Law Enforcement Act, or
CALEA, requires telecommunications carriers to modify
their equipment, facilities, and services to ensure that they
are able to comply with authorized electronic surveillance.
These modifications were required to be completed by June 2000,
unless carriers were granted temporary waivers, which we and
many other wireless providers requested. One of our waiver
requests remains pending at the FCC. Additional wireless carrier
obligations to assist law enforcement agencies were adopted in
response to the September 11 terrorist attacks as part of the
USA Patriot Act.
In August 2004, the FCC released a Notice of Proposed Rulemaking
and Declaratory Ruling proposing new rules governing CALEA. The
notice largely endorses proposals by federal law enforcement
agencies in a February 2004 filing. If adopted, the rules
proposed in the notice would subject a wider range of services
to CALEA, greatly limit the availability of waivers from the
CALEA rules and shift costs for complying with CALEA from law
enforcement agencies to service providers and customers. These
changes could increase our costs. The notice also determined
that push-to-talk services, such as those offered by Nextel and
Verizon, are subject to CALEA requirements.
Telephone Numbers. Like other telecommunications
carriers, we must have access to telephone numbers to serve our
customers and to meet demand for new service. The FCC has
adopted rules that could affect Triton’s access to and use
of telephone numbers. The most significant FCC rules are
intended to promote the efficient use of telephone numbers by
all telecommunications carriers. Under these rules:
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Carriers must meet specified number usage thresholds before they
can obtain additional telephone numbers. The current threshold
requires carriers to show that they are using 75% of all numbers
assigned to them in a particular rate center. The FCC has
adopted a “safety valve” mechanism that could permit
carriers to obtain telephone numbers under certain circumstances
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Carriers must share blocks of telephone numbers, a requirement
known as “number pooling.” Under number pooling,
numbers previously assigned in blocks of 10,000 are assigned in
blocks of 1,000, which significantly increases the efficiency of
number assignment. In connection with the number pooling
requirement, the FCC also adopted rules intended to increase the
availability of blocks of 1,000 numbers, including a requirement
that numbers be assigned sequentially within existing blocks of
10,000 numbers. |
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Carriers must provide detailed reports on their number usage,
and the reports are subject to third-party audits. Carriers that
do not comply with reporting requirements are ineligible to
receive numbering resources. |
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States may implement technology-specific and service-specific
area code “overlays” to relieve the exhaustion of
existing area codes, but only with specific FCC permission. |
The FCC also has shown a willingness to delegate to the states a
larger role in number conservation. Examples of state
conservation methods include number pooling and number
rationing. Since 1999, the FCC has granted interim number
conservation authority to several state commissions, including
North Carolina and South Carolina, states within our operating
region.
The FCC’s number conservation rules could benefit or harm
us and other telecommunications carriers. If the rules achieve
the goal of reducing demand for telephone numbers, then the
costs associated with potential changes to the telephone
numbering system will be delayed or avoided. The rules may,
however, affect individual carriers by making it more difficult
for them to obtain and use telephone numbers. In particular,
number pooling imposes significant costs on carriers to modify
their systems and operations. In addition, technology-specific
and service-specific area code overlays could result in
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segregation of wireless providers, including us, into separate
area codes, which could have negative effects on customer
perception of wireless service.
Wireless providers are also required to implement telephone
number portability, which enables customers to keep their
telephone numbers when they change carriers. Wireless number
portability was implemented for the top 100 metropolitan
statistical areas in November 2003, and generally became
available in the rest of the country in May 2004. Under the
FCC’s rules, numbers may be ported to and from both
wireless and landline providers. Thus, while portability makes
it easier for customers to change wireless providers, it also
makes it easier for them to switch from landline to wireless
service. Certain aspects of the FCC’s rules, including the
obligation to port landline numbers to wireless providers, are
subject to pending appeals to the United States Court of Appeals
for the District of Columbia Circuit. In September 2004, the FCC
released a Notice of Proposed Rulemaking seeking comment on
proposals to reduce the time interval for porting numbers
between wireless and landline carriers. If adopted, the reduced
porting period would make it more attractive for customers to
switch their service from landline to wireless providers.
Environmental Processing. The antenna structures we use
are subject to the FCC’s rules implementing the National
Environmental Policy Act and the National Historic Preservation
Act, or the NHPA. Under these rules, any structure that
may significantly affect the human environment or that may
affect historic properties may not be constructed until the
wireless provider has filed an environmental assessment and
obtained approval from the FCC. Processing of environmental
assessments can delay construction of antenna facilities,
particularly if the FCC determines that additional information
is required or if there is community opposition. In addition,
several environmental groups unsuccessfully have requested
changes in the FCC’s environmental processing rules,
challenged specific environmental assessments as inadequate to
meet statutory requirements and sought to have the FCC conduct a
comprehensive assessment of the environmental effects of antenna
tower construction. In February 2003, several of these groups
filed a petition with the United States Court of Appeals for the
District of Columbia Circuit seeking to force the FCC to modify
its environmental processing rules to address issues under the
Migratory Bird Treaty Act. There is no schedule for court action
on this petition. In August 2003, the FCC released a Notice of
Inquiry on the potential effects of towers on migratory birds
and in September 2003, the FCC announced that it had reached an
agreement with the State of Michigan to study the effects of
towers on bird populations. In December 2004, the FCC sought
comment on a report on the potential effects of towers on
migratory birds that was filed in the Notice of Inquiry
proceeding. In May 2003, the FCC announced its intent to develop
a strategic plan to address environmental and historic
preservation issues and in October 2004, the FCC released a
Report and Order adopting a national agreement governing review
of towers under the NHPA. The agreement defines when historic
preservation analysis is required and not required for new and
modified towers, creates new procedures for historic
preservation review, including deadlines for reviewing entities,
and outlines procedures for communications with Indian tribes
and Native Hawaiian groups.
Rate Integration. The FCC has determined that the
interstate, interexchange offerings (commonly referred to as
“long distance”) of wireless carriers are subject to
the interstate, interexchange rate averaging and integration
provisions of the Communications Act. Rate averaging and
integration requires carriers to average interstate long
distance wireless communications service rates between high cost
and urban areas, and to offer comparable rates to all customers,
including those living in Alaska, Hawaii, Puerto Rico, and the
Virgin Islands. The United States Court of Appeals for the
District of Columbia Circuit, however, rejected the FCC’s
application of these requirements to wireless carriers,
remanding the issue to the FCC to further consider whether
wireless carriers should be required to average and integrate
their long distance rates across all U.S. territories. This
proceeding remains pending, but the Commission has stated that
the rate averaging and integration rules will not be applied to
wireless carriers during the pendency of the proceeding.
Privacy. The FCC has adopted rules limiting the use of
customer proprietary network information by telecommunications
carriers, including us, in marketing a broad range of
telecommunications and other services to their customers and the
customers of affiliated companies. The rules give wireless
carriers
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discretion to use customer proprietary network information,
without customer approval, to market all information services
used in the provision of wireless services. The FCC also allows
all telephone companies to use customer proprietary network
information to solicit lost customers. FCC rules require that
customer permission be obtained affirmatively to use such
information to market non-communications services or to provide
such information to unrelated third parties, but give carriers
flexibility in obtaining that consent. FCC rules also give
customers the right to “opt out” from the use of
customer proprietary network information by their carriers for
the marketing of communications services and require carriers to
give written or electronic notice of that right every two years.
Billing. The FCC has detailed billing rules for landline
telecommunications service providers and extended some of those
rules to wireless carriers. Wireless carriers must comply with
two fundamental rules: (i) clearly identify the name of the
service provider for each charge; and (ii) display a
toll-free inquiry number for customers on all “paper
copy” bills. In May 2004, the FCC released a Public Notice
seeking comment on a petition filed by the National Association
of State Utility Consumer Advocates, or NASUCA. The
NASUCA petition asks the FCC to prohibit wireless and other
carriers from using line-item charges on customer bills to
recover their costs for various federal, state and local
regulatory obligations. In its March 2005 decision on the NASUCA
petition, the FCC determined that wireless carriers should no
longer be exempt from the FCC’s truth-in-billing
requirements, but it also preempted state regulations requiring
or prohibiting the use of line items for wireless service. In
addition, the FCC is seeking comment on whether it should impose
further billing requirements on wireless carriers, including
adopting certain restrictions on line-item charges, and whether
it should preempt inconsistent state regulation of
telecommunications carrier-specific truth-in-billing rules. As a
consequence of this decision and the new proposals (which have
not been released by the FCC at this time), we may need to
clarify or remove certain line-item charges that are currently
listed on our customer bills. If we are unable to recoup these
charges through other means, the FCC’s decision and new
proposals could have an impact on our revenues.
Access for Individuals with Disabilities. The FCC
requires telecommunications services providers, including us, to
offer equipment an